The Home Bias, Capital Income Flows and Improved Long-Term Consumption Risk Sharing between Industrialized Countries


  • An earlier version of this paper was circulated as The Home Bias and Capital Income Flows between Countries and Regions. We thank the editor, Benn Steil, and two anonymous referees for useful suggestions.

Mathias Hoffmann

Chair of International Trade and Finance

Department of Economics

University of Zurich

Zuerichbergstrasse 14

CH-8032 Zurich


Michael J. Artis

Institute of Political and Economic Governance

University of Manchester


Oxford Road

M13 9PL


Is financial globalization associated with improved international consumption risk sharing? We focus on the long-term (that is low frequency) co-movement of consumption and output in answering this question. Theoretically, the impact of financial globalization should show up first and most robustly in the lower frequencies of the data. We show that this is the case empirically: by the end of our sample period (1960–2007), up to 40% of long-term idiosyncratic consumption risk is shared between industrialized countries – as compared to less than 10% before 1990. This dramatic increase is associated with a huge increase in international capital income flows: while capital income flows remain relatively limited as a channel of risk sharing at business-cycle horizons, their contribution to international risk sharing at longer horizons has increased substantially. Much of this increase can be attributed to the growth in international asset positions over the recent globalization period.